Designed to prevent them from having to lay off workers or shut down completely, it enabled cash-strapped businesses to get tax refunds by redoing their previous year’s taxes to take into account their current losses.
Republicans cut that back, though, to help finance the Tax Cuts and Jobs Act, and that decision is now coming back to haunt lawmakers as restaurants, airlines, cruise lines and myriad other businesses face mounting losses from customers staying home in the wake of the coronavirus pandemic.
“It is a big problem,” said Alan Viard, an economist at the conservative-leaning American Enterprise Institute. “It’s a bad feature of the TCJA.”
“All of a sudden, it’s become more salient and important.”
It is an example of how the 2017 overhaul can look very different depending on the economic backdrop.
When it was signed into law, the economy was strong and much of the attention was on lawmakers’ big cut in corporate tax rates – a big deal when companies are making lots of money.
But if the economy contracts – which experts say is increasingly likely thanks to the novel coronavirus — the corporate rate won’t matter so much because businesses that don’t make any money don’t pay any taxes.
The focus will instead shift to provisions used to help finance that rate cut, such as the ones eliminating what’s known among tax experts as “net operating loss carrybacks.”
“It was enacted when things were flush, and there was little prospect of recession, but these things have perverse effects when there’s a downturn,” said John Buckley, a former longtime Democratic tax aide and one-time head of the Joint Committee on Taxation.
“Liquidity is going to be a big deal for a lot of these companies,” he said. “If the goal is to give liquidity to troubled companies, the quickest and easiest thing to do is give a carryback.”
It comes as lawmakers wrestle with how to respond to the widening pandemic. The Senate is considering House-passed legislation designed to mostly address immediate challenges posed by the virus. Lawmakers say they intend to pass additional legislation addressing its economic fallout.
“There’s no question – there are businesses that are severely impacted,” Treasury Secretary Steven Mnuchin told Fox News Sunday. “We are focused on helping those businesses that need liquidity.”
Many companies are now pushing Congress to bring the carryback provision back, something lawmakers had routinely expanded during previous recessions.
“Just about every business/industry is pushing NOLs,” said one Republican lobbyist.
In a letter today to lawmakers, the US Chamber of Commerce urged lawmakers to revive the break, following a similar one last week by the National Association of Manufacturers.
The politics are more complicated this time around though.
Depending on how it is structured, it would amount to a corporate tax cut, which would likely be hard for many Democrats to swallow after railing against the 2017 tax cuts as a corporate giveaway.
And many Republicans may be reluctant to unwind, even temporarily, a sizable piece of their tax overhaul so soon after it was signed into law.
“They aren’t going to revisit decisions they just made in tax reform,” another Republican lobbyist predicted.
When companies do their taxes, they’ve long been allowed to roll their losses into past or future years.
The idea was that a company’s fortunes didn’t necessarily line up with the tax year, and that it wasn’t fair to charge businesses taxes on, say, $100 in profits in one year if the next year they lost $100 — because, overall, the company didn’t make any money. (When the New York Times reported that President Donald Trump took a $916 million loss in 1995, that was a net operating loss).
Even in good times, there are a significant number of businesses that lose money, but in recessions, that share spikes.
So beefing up net operating losses has long been one of lawmakers’ go-to moves during downturns. They repeatedly expanded it during the Great Recession, and it’s been a staple of disaster relief too, such as after Hurricane Katrina.
Before the Tax Cuts and Jobs Act, companies could carry losses going back two years.
But the 2017 law banned them from rolling losses backwards and put new limits on carrying them forward as well. Republicans used it to help defray the cost of their legislation.
At the time, the change was projected to generate $201 billion, making it one of the single-biggest payfors in the law. It didn’t get much attention, and wasn’t considered especially controversial – few seemed concerned with what it might mean in the next recession.
“It was politically painless,” said Buckley. “There’s no organized lobby for people who might have losses in the future.”